Thursday, December 10, 2009

Markets appear to be at important cross-roads

Besides the clearly negative performance of assets related to Dubai or Greece, the past weeks have essentially seen range-trading in important markets. However, this range-trading seems to mask some interesting breaks or tests of the medium-term trends, highlighting that the risk of a fundamental change in market sentiment has grown larger again.First, it was widely reported over the past weeks that the trade-weighted USD has broken through its downward trend (see chart below) late October. However, despite this trend-break, the USD continued to make new lows.

Trade-weighted USD broke through medium-term downward trend in October

Source: Bloomberg

One reason why the USD continued to weaken is that this technical signal (the trend break) was not confirmed by the major crosses and the USD remained in its downward trend vs. for example the EUR and the JPY. However, at the end of last week EUR-USD has broken through its upward trendline (see chart below). This to me is the first confirmation that a trend reversal in the fate of the USD is indeed in store.

First confirmation of a USD trend-reversal: EUR-USD has broken through its upward trend

Source: Bloomberg

In the commodities space, the bullish trends have so far remained intact. However, the index as well as some important sub-components are just trading at the trend line. First, the CRB index has almost exactly closed at its medium-term upward trendline (in place since early March) yesterday. The trend was running at 267.55 vs. a close in the index of 267.75. With a slope in the trend of 0.34, the CRB index needs to move slightly higher today in order to remain above this trend.

CRB index is testing its medium-term upward trend

Source: Bloomberg

Within the commodities space, the sub-indices for Livestock and Agriculture remain in a longer term sideways trading pattern whereas industrial metals continue to trade higher. Precious metals technically also remain in a longer-term upward trend despite the latest correction. However, the energy sub-index has closed below this year's upward trend just yesterday.

Diverging behaviour of commodity sub-indices

Source: Bloomberg, Research Ahead

Looking into the energy sub-component, we find that while the roll-adjusted ICE Brent crude future has closed just slightly above its medium-term upward trend yesterday (exactly as the overall commodity index), the ICE WTI crude oil future has broken below this trend on Tuesday and the Nymex WTI crude oil future yesterday.

ICE WTI crude oil future broke through upward trend on Tuesday

Source: Bloomberg

In the equity space, the S&P index is trading just above its upward trendline and also other major equity indices so far remain above the trends. However, the DJ Euro Stoxx 50 index has also broken below its upward trend on a closing basis yesterday.

DJ Euro Stoxx 50 has closed below its upward trendline

Source: Bloomberg

As stated several times previously, in the rates space, 10y Bund and 10y US Treasury futures remain guided by their upward trends.

Overall, markets appear to be at interesting cross-roads and especially the commodity complex looks weak. I think that especially energy commodities trade too high amid a lack of end-demand which should result in lower prices. Therefore, I also look for a break lower in the overall commodity index. Moreover, I still remain convinced that the subdued growth environment will act as a significant headwind for risky assets in general which should become more apparent again once the wave of central bank liquidity ebbs.

1 comment:

excellent charts. Yup I think this dollar/euro break is key. So many dollar shorts leav it so vulnerable for snapback. Hadn't spotted the CRB one though. Commodities including gold at real risk of slump here

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About Me

Daniel was Head of Economics & Strategy for developed markets at Dresdner Kleinwort until early 2009 and was responsible for the well-known 'Ahead of the Curve' flagship publication. He started as a Desk Analyst in the mid-90s for the former German government bond trading desk. He then became Head of Rates Strategy early last decade and later on also took responsibility for G10 economics, commodities strategy and asset allocation.
He is now the owner of Research Ahead GmbH located in Frankfurt am Main.

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